Your Credit Score is a 3-digit number, between 300 & 900, that represents your credit behaviour, including your current liabilities and repayment habits. It is a yardstick for banks and NBFCs, from whom you get your loans, credit cards and other credit facilities, to let them know your creditworthiness, which is basically how well you have managed your loans, credit cards, Buy Now Pay Later facilities, overdraft, or other credit lines.
Lenders seek your credit score to assess the risk factor in lending to you, which is basically understanding whether they should lend to you or not, and if they want to lend, at what interest rates and loan terms should they lend to you.
| Credit Score Range | What It Means |
|---|---|
| NA/NH | "Not Applicable" or "No History". There is no credit history under your name since you have not availed a credit card or loan till date. |
| 350 – 549 | BAD: This credit score could mean that you are in the high-risk group and are not good at managing your credit. This could be due to late payments, missed bill payments, and other bad credit management traits. Credit score in this range makes it difficult to avail new loans or credit scores. |
| 550 – 649 | FAIR: A credit score in this range means that you are fairly good at managing your credit, with room for improvement. While there have been occasional missed payments or late payments, your credit history remains fairly good. NBFCs may lend to borrowers with this credit score range but at a higher interest rate. |
| 650 – 749 | GOOD: A credit score in this range puts you in the less risky borrower group. Banks and NBFCs generally lend to you, albeit with tougher loan terms and slightly higher interest rates. Improving your credit score from this range into the "Excellent" range is quite easy. |
| 750 – 900 | EXCELLENT: A credit score in this range means that your creditworthiness is high, and lenders are willing to offer you the best terms and interest rates on loans and credit cards. It means that you have maintained healthy credit habits with timely repayments. |
As mentioned earlier, the credit bureaus use data from your credit history to calculate or arrive
at your credit score.
The factors that affect your credit score are
Payment History – The most important factor. How regular you are on your loan/credit card payments
Amounts Owed/Credit Utilization –Having very high debts or maxing out credit cards with dues continuing for many months will have a negative impact on your score
Length of Credit history – The longer the credit history, the higher the credit score
Credit Mix – Having multiple types of credit like personal loan, credit card and car loan shows that you can handle different type of credit efficiently and responsibly
New Credit – Taking out credits within short time negatively affects your credit score
Maintaining a good credit score can be done easily by doing the following:
1. Pay Your Bills on Time: Regular and on time bill payment has the highest weightage when calculating your credit score. So always pay your credit card bill or loan EMI on time. Make sure you have set up an alert to remind you about payments or opt for automatic payment where the lender withdraws the money owed on the day already decided by you.
2. Keep Your Credit Utilization Low: Keep your overall credit utilization low, i.e. say you have 2 credit cards which have Rs.50,000 and Rs.40,000 as their respective credit limits which adds up to a total credit limit of Rs.90,000. The recommended credit utilization ratio is 30% i.e. Rs.27,000. If a person keeps using a lot of credit especially maxing out their credit limit will negatively affect their credit score.
3. Don’t Close Old Credit Cards: When you close old credit cards the card issuer stops sending updates to the credit bureaus. The credit bureaus also give less weightage to closed accounts. This could bring about reduction in your credit score. Also, your overall credit limit reduces which means your spending capacity and staying below the ideal credit utilization ratio is difficult. You must remember that after 10 years the closed credit card account will be removed from your credit report which could bring down your score when you really don’t want it to happen.
4. Limit New Credit Application: It is best to limit new credit application within a short time period as each hard enquiry will be listed on your credit report, which brings down your credit score. Also, if lenders see a lot of enquiries listed on your credit report, they will get the impression that you are desperate for credit and don’t know how to manage your finances.
5. Monitor Your Credit Report Regularly: Check your credit report on a regular basis. RBI has mandated that all credit bureaus provide one free credit report each year to customers. But we suggest that you have a look at your credit report at least twice each year.
This is important because there could be mistakes on your report. Th mistakes could occur if the lender makes a mistake or due to identity theft or credit card fraud, which could bring down your credit score.
To err is human. Poor credit score is the result of poor credit behaviour. It’s important you identify those poor financial behaviour to make things right.
Following are the reasons why most people may have poor credit score.
1: Late Repayments
You must remember that even one or two delayed credit card bill or loan
repayments can affect credit score negatively. The more the number of delayed payments, the
greater is the negative impact on your credit history and credit score. Though you may repay the
amount later with a penalty to the lender, it gets reported by the lender as delayed payment to
the credit bureaus.
2: Missed Payments
As major chunk of weightage in credit score calculation depends on
repayment history, hence it is vital you do not miss a single payment on your credit card or
loan EMI. Even a single default can hurt your credit score, making it difficult to avail credit
in the future.
3: Poor Credit Card Utilisation
Maxing out credit card limit implies you are credit hungry
which could impact your credit score negatively. Experts recommend that having a credit
utilisation ratio of 30% and below is good for your credit score. In case you use your credit
card often, you can request for a higher credit limit on your credit card or get another card to
balance the credit utilisation ratio.
4: Multiple Loan Applications
As we already know that a hard enquiry can negatively impact
your credit score, you must keep tabs on your loan applications. Applying for the same loan with
multiple lenders can work against you as multiple enquiries are made. Hence, apply with the
lender only where the approval chances are higher. You can check your eligibility for free for
all loans on financial portal like CreditMantri which can avoid a potential rejection.
5: Administrative Error
Occasionally, there may be an administrative error that results in
wrong information being recorded on your credit report. Sometimes, this might be the result of
fraudulent activity as well. For no fault of yours, these errors could lead to a lower credit
score, signalling to future lenders that you have bad credit.
Foreclosure: It happens in secured loans, wherein the lender sells the property through auctions and retrieve the outstanding loan amount. It can significantly reduce your credit score.
Written-off: The lender writes off your loan or credit card account if you have continuously defaulted on repayments for 180 days. This gets reported to the credit bureaus by the lender, and your credit report shows written-off status. This can affect your credit score negatively and make you ineligible to avail loans.
Settled: When you are unable to repay the loan, the lender allows you to settle the loan account for a mutually agreed amount which would be lower than the outstanding loan amount. This is a negative issue which will impact your credit score negatively.